Market Pricing: Psychological Method

For many years, researchers have investigated customers’ response to product pricing. Some of the results point to several interesting psychological effects price may have on customers’ buying behavior and on their perception of individual products. We stress that certain pricing tactics “may” have a psychological effects since the results of some studies have suggested otherwise. But enough studies have shown an effect that this topic is worthy of discussion.

Methods of psychological pricing include:

Odd-Even Pricing

One effect, dubbed “odd-even” pricing, relates to how customers may perceive a significant difference in product price when pricing is slightly below a whole number value. For example, a product priced at (US) $299.95 may be perceived as offering more value than a product priced at $300.00. This effect can also be used to influence potential customers as those who have bought may mention the price to others as being lower than it actually is. This may be due to the buyer mistakenly recalling the price being “well below” the even number or the buyer wants to impress others with their success in obtaining a good value. For instance, in our example a buyer who pays $299.95 may tell a friend they paid “a little more than $200” for the product when, in fact, it was much closer to $300.

Prestige Pricing

Another psychological effect, called prestige pricing, points to a strong correlation between perceived product quality and price. The higher the price, the more likely customers are to perceive it as higher quality compared to a lower priced product. (Although, there is a point at which customers will begin to question the value of the product if the price is too high.) In fact, the less a customer knows about a product the more likely she/he is to judge the product as being higher quality based on only knowing the price (see Trigger of Early Perception). Prestige pricing can also work with odd-even pricing as marketers, looking to present an image of high quality, may choose to price products at even levels (e.g., $10 rather than $9.99).

Reference Pricing

As we discussed in the Consumer Buying Behavior Tutorial, the process involved in making purchase decisions can be quite complex. But for most customers, the purchase decision will involve a comparison of one product to another with price being a critical evaluative criterion. Because of this, marketers, who believe they have a price advantage, will create an arrangement where customers can easily compare one product to another. As an example, a retail grocery store may price its store brand coffee slightly below a leading premium brand and then place the store brand right beside the premium brand. With effective packaging and labeling, shoppers may feel the store brand is of similar quality but sells for less. In this way, the store hopes customers use the premium brand as a reference point, which will then present the store’s brand as being more attractive in terms of price.

Market Pricing: Price Lining Method

As we have discussed many times throughout the Principles of Marketing Tutorials, marketers must appeal to the needs of a wide variety of customers. The difference in the “needs-set” between customers often leads marketers to realization that the overall market is really made up of a collection of smaller market segments (see Targeting Markets Tutorial). These segments may seek similar products but with different product features, such as different models whose product components (e.g., different quality of basketball sneakers) or service options (e.g., different hotel room options) will vary between markets.

Price lining or product line pricing is a method that primarily uses price to create a separation between the different models. With this approach, even if customers possess little knowledge about a set of products, they may perceive they are different based on price alone. The key is whether the prices for all products in the group are perceived as representing distinct price points (i.e., enough separation between each). For instance, a marketer may sell a base model, an upgraded model, and a deluxe model each at a different price. If the differences in features for each model is not readily apparent to a customer, such as differences that are inside the product and not easily viewed (e.g., difference between digital cameras), then price lining will help the customer recognize that differences do exist as long as the prices are noticeably different.

Price lining can also be effective as a method for increasing profitability. In many cases, the cost to the marketer for adding different features to create different models or service options does not alone justify a significant price difference. For example, an upgraded model may cost 10 percent more to produce than a base model but using the price lining method the upgraded product price may be 20 percent higher, thereby making it more profitable than the base model. The increase in profitability offered by price lining is one reason marketers introduce multiple models. Offering more than one model allows the company to satisfy the needs of different segments.  It also presents an option for a customer to “buy up” to a higher priced and more profitable model.